Newsletter

Free enterprise: When the economic stakes are high

“The politics in (fill in your profession) are so vicious because the stakes are so low.” This dictum — also called “Sayre’s law” — has been applied to describe many disputes over the last 40 years.

In its most common representation it is applied to “campus politics.”

Of course, any enthusiastic discussions that touch people’s lives and livelihoods should probably not be absorbed under this “low stakes” category. However, many people have fun imagining a professor going in circles for hours debating the most minute of rules regarding how to administrate university life.

Touché.

In contrast to this, research that is performed at our nation’s universities regularly has profound impact on millions of people — and that includes research in economics. One example of how high the stakes can be hit the news cycle this week.

A few years ago, two prominent economics professors at the University of Maryland and at Harvard published a paper about the impact of public debt on economic growth that became enormously influential. (A copy of an early version can be found here: http://bit.ly/YQtoKx.)

Professors Reinhart and Rogoff followed this up with a hugely popular book “This time is different” (http://www.reinhartandrogoff.com/) which cites the same paper as related research.

The outsize influence of the paper and the book has to do with their direct relevance to public policy discussions in the U.S. and abroad during the last few years.

The authors had concluded that there is a significant relationship between debt to GDP ratios and growth for high levels of debt.

They wrote: “Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies.”

Given the fact that their conclusions made their way into numerous policy documents (and interviews by politicians), it is clear that this research has impacted public policy debates regarding austerity measures profoundly.

Imagine the bombshell, then, when it became known that a replication of their numbers (which started as a class project by a student) appeared to have shown flaws in the underlying analysis.

That study by a doctoral candidate in economics and two professors (made public this week: http://bit.ly/ZYnim4) states bluntly: “Overall, the evidence we review contradicts Reinhart and Rogoff’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.”

Some in the media gleefully reported that the error had to do with the two professors missing a column in their spreadsheet when deriving some of the summary statistics. The reality is a bit more complex and relates to how certain averages were calculated.

As is good practice in the world of science, the new analysis will undergo rigorous peer review. Also, Reinhart and Rogoff themselves have already reacted to the criticism, acknowledging an error but vigorously defending their overall conclusions (http://bit.ly/Zr70GC).

Given how the blogosphere and Twitter lit up over this issue (with major news outlets jumping into the fray), it is likely that this is one academic research topic that will have caught the attention of many outside of academia.

Outstanding. Public policy debates surrounding the issue of government debt will be enriched by having well-informed voters pondering the evidence.

That is great because the stakes are so very high.

Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University’s College of Business Administration. He may be reached by email at mreksula@georgiasouthern.edu.